As the coronavirus crisis began, market watchers were eager to see if Warren Buffett was Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) will make a big walk. The Berkshire leader has lamented for years that stocks and companies are so expensive, and he has not “bagged an elephant” since his 2015 acquisition of Precision Castparts. The end of an 11-year bull market seems to present a perfect opportunity from him to leverage Berkshire’s $ 137 billion squirreled.
After Berkshire’s shareholder meeting earlier this month and the company’s 13-F filing announcing first-quarter stock moves, we now know that Buffett has not made a substantial purchase. In fact, he̵7;s done the opposite. Buffett is a net seller of the stock, disposing of his stake in four major airlines and restricting holdings to Goldman Sachs at JPMorgan Chase, even though he has become a fan of bank stock fans.
The famous person who said “Be afraid when others are greedy and greedy when they are afraid” now seems scared. Based on his recent comments, we have some sense as to why.
There’s a ton of uncertainty out there
Buffett continues to express long-term optimism through the crisis, but he is more cautious about what’s near the term. In comments at the Berkshire shareholder meeting in early May, Buffett said:
When we started this journey, which we did not ask for, it seemed to me that it was an extraordinary variety of possibilities on the health and the economic side. There was DEFCON 5 on one side and DEFCON 1 on the other, and nobody knew, of course, all the possibilities, and they didn’t know what they were. But in this particular situation, it seems to me that there is an extraordinary range of things that can happen on the health side and an extraordinary scope in terms of economics.
Buffett continues to recognize that the worst case and best case have been removed, but there is still a wide range of possibilities out there – making it difficult for a value investor like Buffett to make smart purchases, as there is a wide range of possibilities for future cash flows and profits. Despite his belief in airlines, for example, Buffett believes the industry has begun to change. Demand will decrease for the foreseeable future, which is especially problematic in an industry with high fixed costs.
Buffett was right about the uncertainty. Even in recent announcements from Moderna about a successful phase 1 vaccine trial, we don’t know if there will be an effective vaccine within the next year or two, or even ever. We do not know if there is another wave of infections and if businesses need to close again. The future is much more difficult to predict today.
Prices are too high
Not surprisingly, Buffett, who has complained about the market being overvalued over the past few years, still believes that stocks are overvalued. Although prices are still dropping a double-digit percentage from the high of February, the near-term earnings picture has steadily deteriorated, and cloud uncertainty has the ability to create an accurate one. that forecast.
Asked why Berkshire didn’t act as a support lender as it did so many times during the financial crisis, taking favorable stakes in the form of preferred stock and warrants, Buffett said, “Well, we have never seen anything attractive. ” Buffett added that the Federal Reserve is stepping up to support businesses that might otherwise come to Berkshire for help, saying, “But that means a lot of companies need money and maybe they should be done. they are financing a little bit, but they are perfectly decent company, having the opportunity to fund in a massive way over the last five weeks or so. “
Buffett said he was getting calls from companies in distress, but didn’t find any of them appealing, so Berkshire held its purses.
Sometimes it pays to wait
Buffett is not a fan of market timing, saying he doesn’t know anyone who can do it, but he does see that in the last crisis he might act soon too. Referring to the purchases made by Berkshire in the fall of 2008, Buffett said “Now we find that we are better off if we wait four or five months to do similar things.”
The Berkshire leader has also made some of his best deals at the end of the crisis. For example, in 2011 he bought $ 5 billion in preferred stock at Bank of America, which yields 6%, a deal that has net the company more than $ 20 billion, including some B-A investments later.
Buffett may have realized that better opportunities presented themselves as the crisis unfolded. It’s only been two months since the shutdowns started, so for struggling businesses it’s likely to be lighter a few months from now.
Buffett maintained his common hope in the American economy, saying, “We have never faced this exact problem. In fact, we have not really faced anything that resembles this problem, but we have faced more difficult problems. America’s miracle, American magic has always prevailed, and will do it again. “
In fact, over the long-term, U.S. stocks and the economy are always returning and continuing to grow – and over a five- or 10-year horizon, the coronavirus may prove to be just a dip. But Buffett’s careful tone is noticeable, and it is clear that there is a high degree of uncertainty in the future.
Whether Buffett will go elephant-hunting this year remains to be seen, but for now Omaha’s Oracle seems content to keep his powder dry.